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Will Microsoft Buy the New Citrix?

News Analysis: A Microsoft acquisition of Citrix would allow it to distance itself from the awkward GPL aspects of what XenSource does, analysts say.

Could Citrix Systems purchase of XenSource for $500 million be a prelude to Microsofts acquisition of Citrix?

Some analysts, like Brenon Daly and his colleagues at The 451 Group, in San Francisco, think so.

"Citrix built a $1 billion-plus business on the back of its access to Microsoft source code. XenSources exclusive access to Microsofts forthcoming Viridian hypervisor code is a key driver for this deal," he told eWEEK Aug. 15. "For Citrix, Viridian becomes the base operating system component for its next business, just as Windows Terminal Server has been for Presentation Server."

Further reading

While Microsoft might well have moved to acquire XenSource itself, that possibility was stymied by intellectual property issues involving the Xen hypervisor, which is licensed under the GNU General Public License and used in Linux distributions by both Red Hat and Novells SUSE Linux.

"An acquisition has seemed reasonable to us ever since XenSource cut its deal with Redmond for Viridian source code in June 2006. But open source remains a sticking point for the powers that be in Redmond," Daly said.

A Microsoft acquisition of the combined Citrix-XenSource makes sense now as it would allow Microsoft to distance itself from the awkward GPL aspects of what XenSource does, while fusing its own server consolidation offerings into a credible virtualization desktop utility stack, he said.

"Citrix and XenSource are discussing spinning out the open-source Xen project into a nonprofit foundation, as IBM has done with Eclipse," The 451 Group Senior Analyst Rachel Chalmers told eWEEK.

At that point, the combined Citrix-XenSource would become a purely proprietary software vendor, with a product that could manage virtual machines hosted on Xen or Microsofts hypervisor, code-named Viridian, making it "a much more attractive acquisition target for Microsoft," she said.

A Citrix acquisition would also let Microsoft get its hands on the lucrative $1 billion in enterprise Windows revenues now generated by Citrix Presentation Server, Daly said, noting that Microsoft would not be the only potential suitor for the new Citrix, with Hewlett-Packard and Cisco Systems also likely in the game.

Daly said competition in the virtualization market is also heating up, particularly given VMwares lead in that space, with Microsoft feverishly working on the delayed Viridian hypervisor, while also working on its technical collaboration agreement with XenSource, he said.

"Both XenSource and Microsoft will be hoping VMwares IPO proves to be a distraction. VMware is way ahead of both in the market, but its still early on. Microsoft is biding time for Viridian, trying to slow the market as much as it can, now that its had to push Viridians debut out," Daly said.

But, equally, Citrix, Xen and Microsoft will also likely be consumed with building out, integrating and plotting for at least a year once the deal has closed, giving VMware time to concentrate on sales, he said.

Larry Orecklin, general manager of System Center and Virtualization for Microsoft, based in Redmond, Wash., hinted at a closer collaboration between Microsoft and the new Citrix, and referred to the huge opportunity that exists in the virtualization space.

"Citrix and XenSource are strategic partners for Microsoft, and we believe this collaboration will create a closer partnership between todays Xen platform and the new Windows Server Virtualization technology in the future," he said.

"Todays acquisition of XenSource by Citrix, and VMwares recent IPO, are strong indicators of the dynamic nature of the virtualization market. With less than 5 percent of servers across the globe currently virtualized, the market is still emerging and full of innovation and opportunity for customers," Orecklin said.

Daly and his colleagues at The 451 Group agreed with this, saying in a research report released Aug. 15 that the virtualization market revolves around three players, "market darling VMware; Citrixs combination of young blood and old money; and the (potential) threat of Microsofts Viridian, currently slated to ship in the third quarter of 2008, giving Citrix and VMware a 12-month window of opportunity before Microsoft shows its full hand."

"Critically, Citrix could give XenSource the channel infrastructure it needs to put real price pressure on VMware, while Xens crucial and growing relationship with Symantec/Veritas—remember XenSource CEO Peter Levine was an early employee at Veritas—gives it links into the storage world that will play well with enterprise customers and provide Citrix a counter to VMwares relationship with EMC," the report said.

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